How many bailouts do we need?

The new government has to decide whether or not it wants to go to the IMF for another bailout package. The finance minister has already indicated that opting for a bailout package isn’t out of the question in view the financial emergency that the country finds itself in.

We must understand what the IMF is meant for. It isn’t merely an institution of last resort to administer short-term loans and bailout packages. It has a far greater role to play in helping open up the economy for world trade. This runs the risk of fluctuations as it leads to the absence of a local model of development, fewer chances for the local industry to grow to reduce imports, the sale of state-owned entities to the private sector, and the growing focus on attracting foreign investment.

The purpose of the IMF is to deal with the deficits in the balance of payments by offering financial support. Of course, it doesn’t do this without securing guarantees from borrowing governments. In return, these governments have to stabilise macroeconomic indicators, particularly with regard to narrowing down the trade and current account deficits, and ensuring exchange rate stability. However, a detailed account of the assistance provided by the IMF across the world during over the last two decades suggests that financial crises have increased in various countries, whether they are in Latin America, South Asia, Africa or Europe

Though we cannot say that the IMF has entirely failed to benefit the borrowing countries, the benefits are short-lived and cannot sustain the pressures of pulling the economy out of a crisis through macroeconomic stabilisation efforts.

What we often forget when we approach the IMF is that the institution doesn’t build long-term growth through infrastructure and the distribution of means of production resources. It simply provides oxygen to a dying economy. In theory, the IMF makes short-term loans in exchange for policy reforms in recipient countries to move their economies towards the free market. This hasn’t helped us and Pakistan has instead become more addicted to loans.

Political economists have long been critical of IMF bailout packages as they don’t appear to help countries in achieving self-sustaining growth through free-market reforms. Economic pundits aren’t the ones who have to suffer because of the loans. The poor, who cannot afford the stringent conditionalities of the IMF’s intervention, often have to bear the brunt of these loans. Paradoxically, rich counties often give funds to the IMF to help poor countries. But this is making developing countries even poorer.

The policies that are included in IMF bailout programmes could have been undertaken without going to the IMF if we truly want to initiate macro-economic reforms. IMF loans have an immediate negative effect in terms of moral hazards. Investors believe that if anything goes wrong, they will be rescued by the IMF. But that is not the case.

Bailouts ultimately become burdens because they aren’t being managed properly by our governments. Money goes to the same institutions that have created these crises. The government becomes reluctant to initiate reforms. This is especially true for the current coalition government, which will pose a challenge to reaching a consensus on these matters.

As a result, the poor will suffer prolonged economic agony due the Fund’s bailouts. It is difficult to accept the justification that these conditionalities will urge us to initiate more reforms. Previous records Pakistan’s dependency of the IMF shows that conditionalities haven’t turned out to be favourable for the country. Instead, Pakistan has lost its credibility in international regimes. So, cutting off loans enables the government to adopt a more serious approach to introducing reforms.

The reform period is also prolonged when we restart process of obtaining financial assistance again from the IMF. We must understand that the Fund will never discourage loans to borrowing country as this gives more leverage to the IMF to impose pressure on borrowers, not only for current loans but also on previous loans. This favours the IMF’s bureaucracy as a large part of the loan goes back to the IMF through technical assistance, experts, and facilitation, which makes the Fund’s conditionality much less credible.

Ironically, whenever policy reforms are forthcoming and high on the political agenda of the government, the Fund resumes its lending. This is beneficial for the IMF.

At this stage, we still need external funds. The finance minister has the choice to either go to the IMF or seek fresh loans from Chi­na.

We need to consider the fact that China, under the One Belt One Road (OBOR) project, has given loans for infrastructural projects, which are ultimately spent on Chinese products. This is a stronger reason for the balance of payment deficit. Moreover, China is lending to Pakistan in US dollars. Since Pakistan is not able to diversify its exports, the exchange reserve of the loans is also not benefiting. Washington is already apprehensive that the rationality OBOR projects are risky due to political rather economic decision-making.

The Chinese option can only work if lending from China is consistent with Pakistan’s economic sustainability in the future. If not, such loans can create the risk of sovereign debt, particularly in terms of borrowed infrastructural projects. The example of Sri Lanka shows that Beijing took control of the Hambantota Port as the Sri Lankan government was unable to pay debt. Interest rates are quite important in this connection.

However, US pressure on the IMF and Pakistan for not negotiating a bailout package doesn’t make any sense; it merely serves America’s interests. The bottom line is that Pakistan has been engaged with the IMF’s loan programmes since the 1980s. There have been 14 IMF financing programmes since then. This time, it would seek more than $12 billion. We can once again opt for a bailout package with the result of more impending crises. Therefore, the inexplicable evil design of a lending agency, be it China or the IMF, aren’t the root of our problems. In fact, it is due to our own government’s failure to learn that we are facing crises involving poor policymaking, and corruption among policymakers and institutions.

If these elements persist in the new government, then any bailout package won’t create any significant change. China has already pumped $1 billion and around $4 billion is expected from Saudi Arabia. In the next three months, the Asian Development Bank will also lend $2 billion on a monthly basis, which will add between $7 billion and $8 billion to our foreign reserves.

PM Khan’s government has to make decisions in light of these issues. The new government has to take immediate steps to deal with the critical issue of an import-led growth strategy for CPEC’s infrastructural projects, which are the main cause of balance of payment crises. It must be established that an export-led growth strategy is different in large countries than it is in smaller countries.

Our 70-year history exhibits that borrowing from abroad, including China and the IMF, has already failed. Another bailout package will lead the Imran Khan-led government to repeat the mistakes made by successive governments. The bailout programme has been an avenue for the IMF to ensure that countries like Pakistan are always riddled with debt.

The writer is a political economist and the author of ‘Debt Dependence’.

Email: dr.noorfatima@iiu.edu.pk

(This news/article originally appeared in The News on August 30th, 2018)